HB 171 
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Copy 1 



1. 



HB 171 

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OUTLINE 



OF 



KCONOM ICS 



EMILY GREENE BALCH 



4 

,^ 11 y Wellesley, 1890 

j23 • ^ 



Cambridge: 

The Co-operative Press, 114 Austin St. 

1899. 






0CT171B99 



J 



.*'1" 

^ i" 



43627 

copyright, 1899 
By Emily Greene Balch 

TWO COPIES RECEIVED. 



•ECOND COPY, 










CONTENTS 



Page. 

PART I. — PRELIMINARY 5 

PART II. — PRINCIPLES OF ECONOMICS 7 

Chapter I. Production 7 

Natural Agents 7 

Labor 9 

3. Capital 9 

4. Enterprise 10 

Conditions affecting Production 10 

Chapter II. Consumption 11 

1. Individual Problem of Consumption 11 

2. Social Problem of Consumption 12 

3. Apportionment of Income 12 

Chapter III. Value and Exchange 13 

T. Determination of Value 13 

2. Money 1 5 

3. Credit 17 

4. Prices 18 

Chapter IV. Distribution 18 

Population 19 

Shares in Distribution 19 

1. Rent 19 

2. Interest .' '.. 21 

3. Profits 22 

4. Wages 22 

The Principle of Distribution 25 

Chapter V. The Economics of Government 26 

1. The Economic Functions of Government 26 

2. Public Revenue 26 

PART III.— SCOPE AND METHOD OF POLITICAL ECONOMY 28 

Chapter I. Development of Economic Thought 28 

Chapter II. Scope and Method 30 



PART I. 

Treliminary. 

Political Economy, or Economics, treats of man in his relation to 
wealth. The subject is commonly divided into Production, 
Exchange, Distribution, and Consumption ; (convenient 
headings, but an imperfect analysis). 
Consumption, the gradual or instantaneous using up of a commodity, 
may be either 
Direct (final) consumption, 
Indirect (or productive) consumption. 

Note that much final consumption is also productive. 
Final consumption is the object of all production and of al 1 
indirect consumption. Final production which is also 
productive is doubly desirable. 
Production, the production, by combination and re-arrangement, of 

utility ; form utility, place utility, time utility, services. 
Exchange, the transfer of commodities either directly by barter or 
indirectly by means of money ; properly a kind of produc- 
tion. It involves questions of value, money and price. 
Distribution, the apportionment of the product among those co- 
operating to produce it, whether personally, or indirectly by 
contributing the use of land or capital. Questions of rent, 
interest, wages and profits come under this head. 
Correlation of economic activities. 

The same individual consumes, produces, exchanges. 
All these activities interact. 

The conception of an economic organism — unconscious and 
conscious cooperation — how regulated. 
Natural basis of economic phenomena : 

Man's wants, imperative and expansive ; 
Limited natural supply of means of satisfaction ; 
Consequent cost, in effort and sacrifice, to increase the supply. 
The economic object of man is to secure the maximum of 
satisfaction with the minimum of cost. This necessi- 
tates comparison of utilities with one another and with 
costs, and of costs with one another. All economic 
action is determined by such comparisons. 
Note psychological character thus given to the subject. 



Wants : Primary, due to physical needs (subsistence wants). 

Secondary, due to desire for pleasure (or avoidance of pain). 
Note and criticize tendency to growth and diversification of wants. 

The satisfaction of wants is progressive (Weber's law). 

Note recurrence of want after an interval. 
New wants are substituted for those satisfied. 
Utility : power to satisfy a want (even if satisfaction is ultimately 
injurious). Utility not an inherent quality, purely relative 
to human want, decreases as want is progressively satisfied. 
Marginal utility (final utility): utility of last unit supplied. 
Relation of marginal utility to amount of supply can be 
conveniently expressed by a diagram (" utility 
curve "). 

Note that where supply is unlimited (/. e. more than is wanted) the 
marginal utility is nothing. 

Cost may be either Effort or Sacrifice of something desirable. (It 
may be regarded as negative utility). 
Labor — how far to be regarded as cost? 
Sacrifice of alternative use of material, time or opportunity. 
Note distinction between individual and social cost. 
Wealth : means of satisfying wants are wealth 
if not "free," 
if transferable. 



PART II. 

Trinciples of Economics. 

CHAPTER I.— PRODUCTION. 

Main forms of production ; extractive industries, manufacturing, 

commerce. 
Historical stages of production ; Hunting and gathering of natural 
products, Pastoral life, Agriculture, Manufacture and 
Commerce. 
Object of production ; first Consumption, later Exchange (" house- 
hold economy" versus "market economy"). 

Note historical growth of the market (field of exchange). 
Factors or agents of production : 

Natural agents or resources, of which land is most important. 

Note that word " land " often denotes this whole class. 
Labor, or human agency. 

Note that management or enterprise may be considered either as 
a kind of labor or as a fourth factor of production. 

Capital; wealth produced by past labor used in producing 
more wealth. 

I. Natural Agents. 
Natural agents contribute site, energy, material. 
Natural agents are 

(i) Unappropriated (either because not appropriable or 

because not scarce); 
(2) Appropriated. 
Character of the supply : 

Of the nature of a fund (measured by amount) ; 
Of the nature of a flow (measured by rate). 

Note that land as basis of agriculture partakes of both characters. 
Moreover, the supply may be 
Unlimited ; 
Limited absolutely ; 
Subject to increase by human effort. 
Note that land as basis of agriculture belongs to last class. 



i ^ 

Problem of the economic use of land as regards economic pro- 
portions of land, labor and capital {i.e. how much labor 
and capital should be spent on a given piece of land). 
Note that the following discussion refers to agriculture only. 
On a given piece of land in a given state of agricultural art 
there is a certain expenditure of capital and labor 
which will give the greatest possible return per unit 
of expenditure. 

Note that return is measured here by amount of product, not by 

value of product. 
Note that capital and labor are reduced to common terms as 

expenditure. 

If less than this had been expended an increase of expendi- 
ture would increase returns more than proportionately 
(" increasing returns "). 

Note that expenditure and returns are not commensurable, but rate 
of increase of expenditure and rate of increase of returns are 
commensurable. 

If more than the first amount had been expended the returns 
per unit of expenditure must have been less, i.e. beyond 
that point an increase of expenditure means diminish- 
ing returns. 
Law of diminishing returns : 

Expenditure of more than a given amount of labor 
and capital on a given piece of land results 
in a diminished amount of product per unit 
of expenditure. 
The point of diminishing returns 

is that degree of expenditure which cannot be ex- 
ceeded without diminishing returns in pro- 
portion to cost. 

Illustrate with three similar fields cultivated (i) up to this point, 

(2) not up to this point, (3) beyond this point. 
Note I. The point of diminishing returns may differ 

for every differing piece of land, 

for everv different use the land may be put to, 

with every change in agricultural art. 
Note 2. Soil may grow more or less fertile as it is used. Any 

change in fertility may alter the point of diminishing returns 

but there will be such a point in every case. 

What would be the result if a field had no point of diminishing 

returns.'' 
Note 3. The value of the product may alter. This will alter the 

degree of expenditure which will pay best but not the degree 



of expenditure which will give the greatest proportion of product 
to expenditure. — Suppose a field yielding diminished returns 
with increased profits. 
Consider the same problem with regard to other uses of land, 
e.g. for mining, building, fisheries, water power. 

2. Labor. 

Productive labor, that which conduces to the production ot utility, is 
alone to be considered. 

Note narrower sense given to the term productive labor by J. S. 
Mill (labor productive of wealth). What labor is excluded by 
the former definition .' by the latter 1 

Production depends on the number of laborers, on the duration of 
their labor, and on its efficiency as regards quantity and 
quality of product. 
Efficiency depends on personal causes and external causes. 

Personal causes are chiefly the physical, mental and moral 
capacity and disposition of the worker, determined 
by his 
Natural character and ability, 
Training and education. 
Standard of living, 

Incentive (either economic or non-economic). 
External causes of efficiency include 

A. Organization and combination of labor in 

Simple cooperation, 

Division of labor ("division of employment") as 
between different (i) Objects of produc- 
tion, (2) Processes or functions, (3) Lo- 
calities. 
Note narrow limits of efliciency of unaided individual. 

B. Material for labor. 

C. Auxiliaries; 

Tools, 
Machinery. 
Note tendency to specialization of labor and elaboration of ma- 
chinery. Advantages and disadvantages of each. 

3. Capital. 

Capital : wealth produced by past labor and devoted to production. 
Note difference between this ("economic capital", "social capital ") 
and capital in the ordinary sense of wealth used as a source of 
income ("private capital"). 



lO 

Origin of capital in diflference between amounts produced and 
directly consumed ; capital may be multiplied by extension 
of production or by restriction of consumption. 

Note use of the term "abstinence" or "saving" to characterize 
this. In what sense justified ? 

Object of capital : to make production more efficient by providing 
Tools, 
Material, 
Support for labor. 

Note that indirect processes are often most efficient. 
Note historical tendency of production toward more indirect, com- 
plex and " capitalistic " forms. 

The consumption of capital, immediate or gradual, is involved in 
its use. 
Circulating capital is consumed in one use. 
Fixed capital is consumed gradually. 

Note the necessity of replacement of capital at once or by a sinking 

fund to cover waste. 
Note that the use of capital on the average adds to the efficiency of 

the product more than enough to pay for its consumption. 

4. Enterprise. 

Enterprise : the contribution to production of the entrepreneur or 

responsible undertaker. 
Forms of enterprise : 

A. Individual; independent producer, slaveowner, employer. 
Note tendency to differentiation of factors of production. 

B. Collective ; e.g. Cooperation, Partnership, Business Cor- 

porations, Public Administration (National, Municipal, 
etc.) 

Note advantages and disadvantages. Note that Socialists desire 
to see the latter form supersede all others. 

Large scale versus small scale enterprises. 

Note relative advantages in Manufactures, Agriculture. 

5. Conditions affecting Production. 

Production is affected by almost everything that affects society but 
notably by legal institutions as to Property and Industrial 
Freedom. 
Property : 

Property in Slaves, ancient and modern. 



i II 

Propert)' in Land ; 

Collective, 

Feudal, 

Private. 
Property in Capital. 
Property in "consumers' goods." 

Note the existence of property not embodied in any material thing 

but consisting of certain valuable rights. 
Note limitations on private property and rights of society as regards 

it, e.g. right of taxation, eminent domain, alteration of property 

rights (including question of compensation for vested interests, 

question of damages and betterments). 
Note economic advantages and disadvantages of private property of 

different kinds. Arguments for collective ownership of land 

and capital. 

Industrial Freedom. 

Historical tendency away from custom and regulation toward 
freedom. 

Note restrictions imposed, even under regime of free contract, from 
considerations of finance, police. 



CHAPTER II. — CONSUMPTION. 

Consumption is determined by considerations of maximum net 
utility. 

I. Individual Problem of consumption. 

Where no question of cost or limitation of supply is to be 
considered consumption will be carried to the point of 
complete satisfaction. 

Where the only consideration is sacrifice of alternative 
satisfactions comparison of marginal utilities will 
determine consumption. 

Where cost is involved the consumer must consider marginal 
utility, cost and the means of meeting cost. Con- 
sumption will be carried to the point where in each 
case the marginal utility secured at least equals the 
cost and where no further extension would in any 
case be worth while. 

Note that the amount of a purchase will vary directly with the 
marginal utility, inversely with price, directly with wealth of 
purchaser. 

Note similar comparisons of cost and marginal utility made to deter- 
mine how far to carry production. 



12 

Where present and future satisfactions must be compared a 
want in the future regularly counts for less than the 
same want in the present. 

Note that this is due to the uncertainty of the future and also, appar- 
ently, to a psychological disposition to undervalue the future ; 
this tendency lessens with growth in intelligence and self- 
control. 

Provision for future wants by 
Hoarding ; 
Investment ; 
Insurance. 
Social Problem of Consumption. 

Comparison of consumption by one person with consumption 
by another. 
How far is such comparison possible ? 
Would equal consumption give maximum utility ? 

Note transfer of means of consumption from ethical motives, and 
vast amounts consumed through charity. 

Possible divergence of estimate of utility and cost from indi- 
vidual and from social point of view. 

Note responsibility of consumer for conditions of production. 
How far is purchase equivalent to an order to produce .'' 

Productive versus unproductive consumption. 

What exceptions to the rule that the former is socially 
preferable ? 

Consider the limits and functions of luxury. 
Collective consumption, advantages and disadvantages. 
Regulation of consumption. 

Note various motives, ethical, political, etc. 

Note various methods, sumptuary laws, taxation, prohibition, etc. 

Apportionment of Income. 

" Engels law" as to variation of relative expenditure with 
income. 
Compare results of Le Play, Dr. E. R. L. Gould. 

The economic function of the housewife. 
Historical changes in standard of living. 

The element of custom and fashion (advantages and disad- 
vantages). 
Waste : individual and social point of view. 
The effect of insurance. 



13 



CHAPTER III. — VALUE AND EXCHANGE. 

Origin of Exchange : Differences in desires, Differences in oppor- 
tunities and abilities, Advantages of division of labor. 

Note primitive peoples with no conception of exchange. 
Note historical increase in importance of exchange. 

Machinery of exchange : Numeration, Weights and measures, Stand- 
ard of value. Medium of exchange, Transportation, Middle- 
men. 

Note disadvantages of barter. 
Value ("value in exchange"). 

The value of a thing or a service is measured by what can be 

got in exchange for it. 
Price is value in terms of money. 

To have value a thing must have marginal utility (the supply 
therefore cannot be "free "). 

I. Determination of Value. 

A. Market Value (and Market Price): that which will result from 
a given state of the market, a particular relation of demand 
and supply. 
Demand : the amount effectively demanded at a given price. 

Note that demand is sometimes used to mean the aggregate price 
offered for a given amount. 

The demand of the individual varies with marginal 
utility and wealth and inversely with price. 

Market demand : the sum of the individual demands 
affecting a given market. 

The demand schedule : the series of different amounts 
demanded at different prices. Demand is elastic 
or not according as it varies much or little with 
price. 
Supply : amount offered for sale at a given price. 

Note distinction of supply and stock (i.e. total amount available for 
sale). 

Supply schedule. 
Competition in Exchange. 

If necessary, buyers overbid one another, sellers under- 
bid one another. 
Higgling of buyer and seller. 



14 

Perfect competition implies perfect intelligence, perfect 
information, perfect mobility and purely economic 
motives. 

Note that in real life competition is never theoretically perfect. 
Where most nearly so ? 

Competition may be replaced, more or less completely, 
by custom or combination. 
Law of Market Price. 

The market price will be that which equalizes supply 
and demand. 
Case I. Demand fixed, supply variable. 
Case II. Supply fixed, demand variable. 
Case III. Supply and demand both variable. 
Note that at the market price all willing to sell for less and all will- 
ing to buy for more are provided for, so that competition has no 
tendency to either raise or lower the price from this point. 
Note possibility of indeterminate price ; 

of more than one market price. 
Law of Indifference of price. 

Apparent exceptions, (i) in imperfect market, (2) where 
dealers offer different guarantees of quality or 
different accessory advantages. 
Note endeavor to get different prices by method of sale (auction, 
Dutch auction). 

B. Normal value (and normal price) : that which will result when 
time is given to adjust supply, the value in the "long 
period " (Marshall). 

Note that normal value as distinct from market value only appears 
if the supply can be increased indefinitely (but not gratui- 
tously). 
Normal value will equal cost of production, (cost including 
sufficient profit to induce production). 
Analyze employer's cost and compare with social cost. 
Note and criticize theorem that value equals labor cost. 

(a) Where cost is uniform normal value equals this cost. 

{F) Where an increase of supply is produced at greater 
cost normal value equals cost of most expensive 
part of the supply demanded and rises as demand 
increases (unless counteracted by other causes). 

Note that the law of diminishmg returns brings agricultural products 
under this head. 

{c) Where an increase of supply decreases cost normal 

value falls as demand increases. 
Note that manufactured products come generally under this head. 



15 

C. Monopoly price : where there is no competition among sellers 
the price can be fixed with sole regard to maximum net 
return (i.e. at the " revenue point "). 

Note that this may coincide with the price under competition. 

Note that if the monopoly price is higher than this the amount sold 
will be generally less. 

Note that the seller may demand the higher price directly or pro- 
duce it by restricting supply. Under what circumstances 
would it be advantageous to destroy part of the supply ? 
Advantageous in what sense .-' 

Varieties of monopolies : 

Monopolies may be due to Personal advantages, Legal 
privileges, Possession of limited natural resources. 
Nature of certain enterprises, Combination. 
Public policy in regard to monopolies. 

Advantages and disadvantages of competition and of 

combination. 
Consider Stuart monopolies, modern patent rights, busi- 
ness trusts, exclusive public enterprises. 
I). Further modification of normal prices by 
Custom; 
Misadjustment of production; 

Note case of overproduction when large fixed capitals are involved. 
Joint production of several products (" by-products ") ; 

Aggregate price must cover aggregate cost but the price 
of each product will be determined in accordance 
with conditions of sale. 
Rearrangement of prices for purposes of advertising ; 
Partial combination ; 
Legislation. 

Note limits of possibility of regulation of prices by law. 

Note that hitherto in discussing exchange, value and price have 

been treated indiscriminately on the tacit assumption of no 

change in the value of money. 

2. Money. 

Functions of Money : as medium of exchange, common measure of 
value, standard of deferred payments, store of value. 

The material used for money should be valuable, portable, inde- 
structible, homogeneous, divisible, of stable value, easily 
recognizable. 

Note variety of historical mediums of exchange. 



i6 

Government functions in regard to money ; the government may 
monopolize coinage, regulate nature and amount of cur- 
rency, declare certain moneys legal tender. 
Note development of art of coinage. 
Value of money. 

The value of money is measured by the goods the money 
will buy. A rise of prices denotes a fall in the value 
of money and vice versa. 
The value of money is determined in the short period like 
that of any commodity by the relations of demand 
and supply. 
The demand for money depends on the total of the sales to 
be effected by means of money so that it is affected 
both by the goods to be sold and by the number of 
times they are sold. 
The supply of money is, similarly, affected both by the 
amount of money available and the rapidity of its 
circulation. 
Note that a general rise or fall of prices often occurs but a general 

rise or fall of values is impossible. 
Note the difficulty of ascertaining the appreciation or depreciation 
of money ; the conception of " the general level of prices." 

The value of bullion (the metal material of money) varies, 
like that of any other commodity, primarily with 
demand and supply, ultimately with cost of production. 
The value of money equals the value of the bullion if coinage 
is free and gratuitous; it equals the value of bul- 
lion plus seigniorage if coinage is free but not gra- 
tuitous. 
Note that the value of money thus follows the usual law, viz. : that 
where supply can be indefinitely increased value equals cost 
of production. 
Note that cost of production is here cost of production where 

greatest (case {i>) above). 
Note the slowness and imperfection of adjustment of value to cost 
owing to durability of metal and slow increase of supply and 
to speculative nature of mining. 
Note the mechanism of adjustment of supply of bullion to market 
conditions. 
Changes in the value of money. 

Effect on creditor, on debtor, of 
Appreciation ; 
Depreciation. 
Note injustice in each case. 



17 

Effects of rising and falling prices on business. 
The problem of a standard of deferred payment. 
Note the proposition of a tabular standard f multiple standard"). 
Gresham's law. " Bad money drives out good," 

If moneys of equal legal tender power and different actual value 
circulate together the less valuable will disappear. 
Note however that a limitation of supply may give a coin of lesser 
bullion value an actual value equal to that of the better coin 
and that they may then circulate together. 
Note that this is the principle on which the value of fractional coin- 
age (token coinage) depends. 
Note that it is only on condition of such limitation of supply that 
the simultaneous circulation of two metals (bimetallism) is 
possible. 

3. Credit. 
Forms of credit : 

Promises ; e.g. book credits, promissory notes, bank notes, 

stocks, government bonds, etc. 
Orders; e.g. checks, bills of exchange and drafts (foreign and 
domestic), letters of credit, etc. 
Use of credit : saves use of money except for payment of balance : 
best exemplified in "clearing" of checks, and in foreign 
exchange where money is shipped to settle the balance 
only. The rate of exchange indicates the amount of 
balance and to whom owed. 

Note tendency to compensation in effect of export of money metal 

on prices and therefore on trade. 
Note that credit operations are essentially barter. 
Credit agencies. 
The Bank. 

Functions: Deposit, Discount, Issue of Notes. 
The Clearing House. 
Credit money ("representative money"). 
Bank notes. 
Government notes. 

I, Paper money as a promise to pay, convertibility being 

maintained : 

Advantages ; saves waste of precious metals, convenient. 

Disadvantages; danger of over issue, resulting in loss of 

precious metals and debasement (" inflation "). 

Danger increased by advantage of depreciation 

, to debtors (including an indebted government), 

and by general ignorance of the subject. 



i8 

2. Paper money as fiat money, inconvertible. 

Theoretically it is possible to maintain its value if the 
issue is carefully limited. Practically there are the 
same dangers as above, only much aggravated. 
Note historical experiments with paper money. 

4. Prices. 

Action of credit on prices : the use of credit replaces money and 
acts as the addition of an equivalent amount of money 
would do. 
Trade tends to equalize prices as between countries and to dis- 
tribute the precious metals accordingly. 
Tendency to periodicity in busmess and recurring crises. Increase 
of production, rising prices and extension of credit are fol- 
lowed by glut of the market, falling prices and shrinkage 
of credit. 

Note in what sense " overproduction " is impossible. 
Historical variations in prices due to changes in the supply of gold 
and silver. 
Money famine of the middle ages. 
Sixteenth centurv revolution of prices. 
Nineteenth century discoveries of precious metal. 

Note also widespread changes in prices due to modern methods of 
cheapening production. 

CHAPTER IV. — DISTRIBUTION. 

Distribution varies in its methods and results 

with the stage of development of industry, 
with the provisions of law and custom, 
with the distribution of property, 
with conditions as regards population. 
The present study is confined to distribution under the con- 
ditions of modern industry, marked by 
(i) private property in land and capital, 
(2) competition and free contract, 
, (3) more or less complete differentiation of landlord, 

capitalist, undertaker and laborer, 
(4) production for market not for use. 

Note that distribution is here determined by competitive bargaining 
and that its problems are primarily special cases under the laws 
of exchange. 



19 

POPULATION. 

Malthus first called attention to the question of the relation of the 
rate of growth of population to the rate of increase of the 
means of subsistence. 
Malthusian theory. 

Population tends to outstrip subsistence, but is kept in 
bounds by "positive checks" and to some degree 
by "preventive checks." 
Note (i) Importance of Malthus' work as a matter of method; 

(2) Explanation of exaggerations of Malthus by conditions in 

England in his time ; 

(3) Many historical movements referable to pressure of popu- 

lation ; 

(4) Relation of Malthusianism and law of diminishing returns. 
Counteracting influences : 

More land available, 

Greater skill in using land, 

Greater productivity in secondary pursuits, 

Decreasing birth rate of advanced populations, 

More favorable composition of population. 

Note that a relative excess of population is possible where there is 
no absolute excess ; a problem of adjustment. 

Note tendency to increase of urban and surburban population. 

SHARES IN DISTRIBUTION. 

The net returns of production are distributed as Rent, Interest, 
Wages and Profits. 

I. Rent. 
Rent : the share of the product received in return for the use of land 
or other natural agents. 

Note contrast of the technical sense with the ordinary sense of pay- 
ment for anything hired. 
The competitive rent of land will equal the difference between the 
value of its product and the cost of production (including 
in cost " ordinary " profits). The value of the product is 
determined in the "short period" by the demand and sup- 
ply, in the " long period " by the cost of production of the 
most costly part of the supply demanded. This is the cost 
on the margin of cultivation, (extensive or intensive). 
Land on the margin of cultivation (extensive) bears no rent 
(" no rent land "). For exceptions see below. 

Note effect of increasing population and rising demand on price, on 
margin of cultivation, on rent. 



20 

Ricardo's law of rent (another form of statement of the above). 
The rent of any given piece of land is determined by 
the excess of the value of its product over that which 
the same application of labor and capital could secure 
from the least productive land in use. 

Note Carey's criticism (that instead of progressive recourse to poorer 

lands poorer lands are historically cultivated first). 
How far is this valid as a criticism of the law of rent ? 

Where the supply of land for a given kind of production is so 
limited that the product is limited and sells for more 
than cost the rent will still equal the difference be- 
tween the value and the cost of the product, but there 
will be no "no rent land." 

Note that where the poorest land that is good for one use bears rent 
for another use there is no " no rent land " for the first use. 

Rent does not determine the price of the product ("enter into 

price ") but is itself determined by price except in the case 

of monopoly rent. 

Monopoly rent : where a given kind of land is all controlled 

by one interest a rent may be asked that will force 

prices up ; in this case rent determines price and is 

itself determined solely on the principle of maximum 

net advantage. 

Note case of rent where land is used for building or business pur- 
poses ; 

case of quarries and mines ; 
case of improvements of land. 

The selling price of land is a capitalization of its rental 
value. 
Property in land. 

The difference between property in land and other sorts of 
property has generally been recognized and modes of 
land-holding have varied widely in different times and 
places. 
Compare the economic advantages and disadvantages of 
communal tenure ; 
servile tenure ; 
peasant proprietorship; 
metayage ; 

cotter holdings, as in Ireland ; 
tenant farmers as in England. 
Note American conditions. 



21 

Criticism of private property in land. 

The argument based on the "unearned increment," 

especially in case of urban land. 
Proposal of nationalization of land. 
Proposal of a "single tax" on land equal to rental value. 

2. Interest. 

Interest : the share of the product received in return for the use of 
capital. 
Note that capital may be " business capital," not capital in the 
proper economic sense. 

The market rate of interest is determined by demand and supply. 

Demand depends on the marginal utility of capital in terms 

of the productivity of capital in productive use, or of 

preference for present over future use in consumption. 

The normal rate of interest depends on the cost of supply in terms 

of sacrifice of productivity of capital in owner's use, or of 

sacrifice of present for future use. 

Note that the determining cost is the cost of the most expensive 
part of the supply required. 

In addition to interest proper the borrower must generally pay 
insurance for risk (often as an indistinguished addition to 
interest rate). 
Loans may be 

Loans of capital (for instance in the shape of mortgages, 
investments in stocks and bonds, subscription to 
public loans, etc.) ; 
Loans specifically of money. The rate is here determined by 
the demand and supply of money, i.e. the condition of 
the money market. 
Note the rate of discount on business paper, the rates on money 

"on call," etc. 
Note the tendency to equal returns to capital in whatever shape, 
(short term loans, permanent productive investments, or leases 
of durable consumers' goods). 
History of Interest. 

Middle ages — high rates of interest, all taking of interest con- 
demned as usury; due (i) to misunderstanding of the 
nature of capital (originated with Aristotle, perpetuated 
by Aquinas), (2) to small scope for productive loans. 

Note tendency of usury laws to raise the rate of interest. Usury 
laws are still on many of our statute books. Is there any 
justification for their retention ? 



22 

Progressive decline of rate of interest (with fluctuations) ; due 
to lessening marginal utility of increased supply 
counteracted by new opportunities for use of capital. 
Note that the effect on accumulation of a decline in the rate of in- 
terest may be either to lessen it or to stimulate it. The older 
economists allowed for the former effect only. 

Socialist theory of interest as due to "exploitation" of labor, as 
unjustifiable both economically and ethically. 

3. Profits. 

Profits : the share received by the undertaker (entrepreneur) of a 
productive enterprise ; consists of the excess of value over 
cost {i.e. undertaker's cost). 
Necessary or minimum profits (ordinary profits) include 
Wages of management, 
Insurance for risk. 

Note that the capitalist and undertaker were formerly regularly one 
person and that the older economists {e.g. J. S. Mill) include 
interest, insurance on capital and wages of management all 
under the general head of profits. 

Differential profits, or pure profits, appear when goods can be pro- 
duced at less than normal cost or sold for more than 
normal price. Such profits, like rent, are the measure of 
differential advantage and do not enter into price. 

Note. The term rent is sometime: used in a broad sense for all 
this class of receipts ("rent of ability", "rent of opportunity") 

The advantage may be a passing one or relatively permanent. 
Repeated profits above the ordinary tend to be cut down by 
competition unless protected (as e.g. by patent rights, 
ability). 
Tendency of profits to an equality. 

Profits tend to be equal as regards the same ability or oppor- 
tunity but not as between different abilities or 
opportunities. 
Note however that competition is here peculiarly imperfect owing to 
lack of information as to the profits obtainable. 

Walker's analysis of profits; the "no profits entrepreneur," and his 
cost to society. 

4. Wages. 

Wages : the share of the product received in return for labor. 
Different labor systems : (i) no division of product; extreme types 
— independent, self-employed (autonomous) labor and 

L. if c 



23 

slavery ; (2) product divided according to custom or con- 
tract ; types — serfdom, wage labor, profit sharing, cooper- 
ation. 

[The following discussion deals only with wages in the narrow 
sense of payment of hired labor under a regime of free con- 
tract.] 

The wages of any particular kind of labor vary primarily with 
demand and supply. 

The demand for labor arises from the difference between cost and 
utility to the employer. Where labor is employed to pro- 
duce for the market the demand depends on 
Productivity of labor, 
Demand for product, 
Cost of labor, 
Available capital. 

On what does the demand for labor for direct use (as e.g. of 
domestic servants) depend ? 

Wages fund doctrine, excessive emphasis on supply of 
capital. 

How far is the wage fund a fixed amount ? 

Note effect of opportunities for self-employment on demand for 
labor. 

Cost of labor is not measured by wages alone, low wages 
may mean dear labor. 
Experiments of Brassey and others as to relation of cost 
and wages, " the economy of high wages." 

Note that there may be no inducement to the employer to pay 
" economic " wages ; contrast free laborer with slave or domestic 
animal in this respect. 

The supply of labor depends on (i) the number of laborers, (2) the 
kind of labor of which they are capable, (3) its duration, 
and (4) its intensity. The conditions governing the sup- 
ply are peculiar in various respects, 
(i) The number of laborers increases and falls off for non- 
economic reasons, though also affected by economic 
conditions. 
The Malthusian theory of increase of labor leads to the 
Ricardian theory of wages ("iron law of wages"). 
Wages tend to fall to subsistence point because 
population increases, depressing wages, till 
checked by lack of subsistence. 



24 

Note that this theory assimilates labor to any freely producible 
commodity (normal price equal to cost of production). 

Note the possibility of wages permanently below subsistence 
point. 

Note that any given "standard of living" maybe substituted for 
mere subsistence if a class of labor refuses to reproduce itself 
except under conditions making this possible. 

Note the tendency of a change from a given standard in either 
direction to perpetuate itself if long enough continued. 

Distinguish real from nominal wages. 

(2) The supply of labor tends to distribute itself among dif- 

ferent employments so as to secure equal returns to 
equal efficiency, with compensation for outlay, risk 
and waiting, and with some allowance for peculiar 
advantages and disadvantages, but this adjustment is 
is very imperfect. 

Note that training is only partly controlled by economic motives. 
Causes of over investment in education, of under investment. 

Note scarcity value of (i) work requiring higher grades of ability, 
(2) work accessible to a privileged group only, (3) work con- 
trolled by a combination, tacit or acknowledged. 

Note relations of non-competing groups and cumulative competi- 
tion in unskilled work; note conditions of adjustment of supply 
to changed demand. 

(3) The supply of labor instead of shrinking with diminished 

demand often increases, especially in point of the 
number of hours worked. 

Note desire to counteract this tendency, to " spread the employ- 
ment," by restricting hours either by law or agreement. 

The wage contract. 

Forms of wage contract are very various. Compare the 
advantages and disadvantages of time wage, piece 
wage, task wage, progressive wage, sliding scales, 
profit sharing, group payment and subcontracting, 
cooperation. 
Restrictions on competitive regulation of labor contract. 

Competition may under certain circumstances work 
injuriously with no tendency to compensation. 

Note conditions of English factory labor early in this century ; con- 
ditions in sweated industries. 

This is partly due to peculiarities as regards the sale of 
labor — labor is inseparable from the laborer, labor 
cannot be stored, the laborer generally cannot 
afford to stand out long for better terms. 



25 

Competition may be controlled or replaced by 
(i) Custom. 

Note historical tendency to diminished influence of custom, fields in 
which still operative. 

(2) Legislation. 

e.g. Statutes of Laborers. 
Note limits to what law can effect. 

Modern factory legislation. 
Note that competition is not done away with, but that the plane of 
competition is controlled. 

*' Living wage " resolutions of public author- 
ities, 

(3) Combination. 

{a) Combination of employers (cf. Adam Smith, 

Wealth of Nations, I, chap. viii). 
{b) Combinations of employers and employed 
to control conditions in a given trade. 
Cf. mediaeval gilds and some modem experiments. 

{c) Combination of employees in trade-unions, 
etc. 
Trade Union functions : 
(i) Mutual insurance ; 

Note especially effect of "out of work" benefit. 
(2) Regulation of labor contract ; 

Effort to regulate supply of labor by limiting 
{a) access to trade, (^) access to union, 
(c) output ; 
Efforts toward collective bargaining. 
Weapons ; the label, boycott, strike. 
Conciliation and arbitration : 

Advantages and disadvantages of trade unions. 

THE PRINCIPLE OF DISTRIBUTION. 

Present principle — competitive bargaining with private property 
in land and capital; open to much just criticism. Other 
possible or proposed principles are — 
Status (custom) ; 
Equality ; 

Adjustment to services ; (how measure ?) 
Adjustment to needs ; (how measure ?) 

What do you mean by " justice " in distribution .^ 



26 



CHAPTER v. — THE ECONOMICS OF GOVERNMENT. 

The point of view as regards wealth ; distinguish private, govern- 
mental, social. The effort to harmonize private and public 
interest ; the theory of natural harmonies. 

Note the conception underlying the " Wealth of Nations." 

I. Economic Functions of Government. 

Note assumption that government activity is inexpedient unless 
demonstrably expedient. 

A. Protective functions : 

Protection against outsiders, 

Protection of person, property, contract, etc.. 

Protection against disease, physical and social. 

B. Developmental functions : 

Education, 

Recreation, 

Investigation, 

Development of natural resources. 

C. Industrial functions ; 

Grants of exclusive industrial privileges ; 
Conditional requirements for exercise of industrial activities ; 
as 
Proof of competency, 
Payments. 
Regulation of conditions of production or terms of contracts 
(in interest of equity, public health, morality, general 
welfare). 
Public industrial administration ; 
Public domain, 
Public industries. 

2. Public Revenue. 

Government activity almost inevitably involves expenditure which 
must in some way be provided for. " The Science of 
Finance, treats of public expenditures and public income," 
(H. C. Adams). 

Note that finance does not deal with economic considerations 
alone. 



27 

Public Revenue is of three kinds ; 

Direct, drawn from public domains and public industries ; 
Anticipatory, drawn from the use of public credit ; 
Derivative, drawn from the income of citizens, mainly by 
means of taxation. 
Taxes. 

Problem of equity in taxation : 
Principle of equal payment ; 

Principle of payment according to cost of service ; 
Principle of payment according to benefit received ; 
Principle of payment according to means (proportional 

taxation) ; 
Principle of progressive taxation. 
Kinds of taxes : 

Indirect taxes ; 
Direct taxes. 
Subjects of taxation : 
Polls ; 
Property ; 
Income ; 
Business ; 
Transactions ; 

Inheritance taxes. 

Effects of taxation. 

Incidence and shifting of taxes. 

Taxation for ulterior ends, e.g. as a means of regulating 
Commerce ; 
Production ; 
Consumption ; 
Distribution ; 

Protective tariffs. 



PART III. 

Scope and Method of Politic a! Economy. 

CHAPTER I. — DEVELOPMENT OF ECONOMIC 
THOUGHT. 

A. Previous to the eighteenth century there is only unsystematic 

thought on particular economic matters, closely limited by 
contemporary economic conditions. 

(ij Classic antiquity. 

Basis, slave economy, 

Xenophon's Oiconomicus. 

Passages in Plato and Aristotle. 

Technical treatises by Roman writers De Re Rustica. 

(2) Middle ages. 

Basis, household economy or else production by a close 
body of producers for a limited market. 
Canonist writers — theories of just price, of usury. 

(3) Mercantile school of sixteenth and seventeenth centuries. 

Basis, widening markets, influx of precious metals, 
increased state need of ready money and interest 
of governments in commerce and industry as 
source of funds. 
Characteristics, exaggeration of importance of money 
(" treasure "), effort to secure balance of trade, 
state regulation of industry, substitution of 
national for local economy. 
A school of statesmen rather than theorists, (notably 
Colbert in France, Cromwell, Frederick the 
Great), and of commercial writers like 
Thomas Mun, Sir Josiah Child, and Charles 
Davenant in England. 
Note beginnings of statistical study [e.g. Sir Wm. Petty, Essays in 
Political Arithmetick, 1691). 

B. Systematic Period. Theories of Natural Liberty. 

(1) Physiocrats (Economistes), France, eighteenth century. 
Believed in a beneficent natural order, reprobated 



29 

\r\terierencQ. (Jaissez faire, laissez passer) \ regarded land 
alone as productive, advocated a single tax on land, 
helped to bring about abolition of restrictions on trade 
and industry. 
A school of French thinkers led by Quesnay, physician 

to Louis XV. Turgot attempted to realize these 

views in his reforms. 

(2) Adam Smith and the English Classical ("Orthodox") 
School. 
The nineteenth century economists of this school be- 
lieved that self interest under free competition 
tends to greatest general advantage ; were influ- 
enced by growth of modern machine industry and 
modern business methods ; were marked by a 
certain capitalistic bias. 
Chief practical achievement abolition of restrictive legis- 
lation, especially the corn laws (Manchester Anti- 
Corn-Law League, led by Cobden, Bright, etc.; 
" Manchester School "). 
Adam Smith, Wealth of Nations, 1776 (first ed'n). 
Rev. Thos. Robert Malthus, an Essay on the Prin- 
ciple of Population, etc., 1798 (first ed'n). 
David Ricardo, Principles of Political Economy 

and Taxation, 1817. 
The work of the school was summarized for Eng- 
land by John Stuart Mill, Principles of 
Political Economy, 1848 (first ed'n). 
Note the optimists H. C. Carey (American) and Frederic Bastiat. 

C. Critical period (the last half century). 

Influenced by the development of modern industrial prob- 
lems, by the failure of competition to always work 
to public advantage and by the obvious insufficiency 
of analyses of "classical" economics. Marked by 
criticism and modification (or rejection) of the older 
views ; much fine constructive work done, but no 
generally accepted synthesis yet attained. Embraces 
very diverse tendencies ; e.g. 
Historical movement : 

In Germany in the fifties led by Roscher, Hildebrand 
and Knies, continued at present by Schmoller, 
Brentano and others. 



30 

In England Cliffe Leslie and Bagehot did much to 
widen the range of economic thinking. Thorold 
Rogers, Cunningham and Ashley have made 
notable contributions to economic history. 

Note that largely a question of method. See below. 
Socialist movement : 

German "scientific" socialism, Rodbertus, Karl Marx. 

"Socialism of the Chair," Adolph Wagner, Schaeffle, 

English " Fabian " Socialism, Sidney Webb, Beatrice 
Potter Webb. 
Ethical movement : 

Increased interest in ethical and social bearings of 
economics widespread. Cf. influence of Arnold 
Toynbee, Ruskin. 

Note relation of this tendency to the historical and socialist 
tendencies. 

Theoretical work : 

The most important contemporary work in economic 
theory is that based largely on subtler analysis of 
value and the conception of marginal utility origi- 
nated (among others) by W, Stanley Jevons, and 
is represented 
in England by Marshall and others, 
in America by J. B. Clark and others, 
on the continent (and most conspicuously) by the 
" Austrian School," Bohm-Bawerk, and 
others. 

Note the tendency of this school to psychological analysis and 
mathematical expression. 



CHAPTER IL— SCOPE AND METHOD. 

A. Scope of Political Economy. 

Different conceptions of the science at different periods ; 
reflected in definitions and names. 
Note etymology of economy. 
Pure and applied economics (political economy as a science 
Of an art). 
How far can action be based on economic considerations alone ? 
Relation of economics to technology, ethics, politics, law, 
sociology. 



31 

Appropriate method. 

Deduction 7'ersus induction. 

Tlie place of observation, hypothesis, experiment. 

The postulates of political economy. 

The conception of economic law. (Contrast with moral 

law, statute law). 
Statistics. 

Historical method, descriptive economics. 
Mathematical methods. 



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